Bankruptcy protections were created to give people who have incurred debts greater than their assets or ability to pay. It is intended to make way for a “fresh” debt-free start. However, there is nothing more frustrating to a small business owner than having to walk away from money owed to them when a customer declares bankruptcy.

There are several different kinds of bankruptcy. Generally they fall into two categories – those that discharge, or eliminate debts and those that restructure, or set up payment plans. There are also different types for individuals vs. business.

Once you are made aware that a customer (whether a company or an individual consumer) has filed for bankruptcy, you must notcontact them directly as long as the case is active. If you have placed their file for collection agency, you must let them know immediately and they too, must cease contact directly with the debtor. No contact means no contact – no bills, no phone calls, no letters.  If the debtor is represented by an attorney, you may make contact with the attorney. You can also file a proof of claim with the court, and you will get notifications as the case progresses.

Your chances  of bad debt recovery depends on many factors, and there are some important things to keep in mind.

1. If your customer is a business, do you have a personal guarantee, which means that the customer will personally guarantee debts of the company? If you do,  and the company declares bankruptcy, you may still have the right to pursue the personal guarantor.
2. If you believe that there are assets that have not been disclosed, or believe for some reason that your debt should be exempted from discharge, you should attend the hearing, and you will have an opportunity to question the debtor.
3. The debtor has responsibilities while in bankruptcy. If they do not perform their duties, their case may be dismissed. If so, you are free to pursue the debt again.
4. If the debtor files a repayment plan for debts that is approved by the court, notify the court if the payments are not made according to the plan.
5. If the debt is discharged, it means that the debt is wiped out, and you cannot recover it. Move on.

Things happen to people and businesses and you cannot foresee every situation, but if you are watching the aging of your receivables, look for signs of trouble and suspend credit, reach out to the debtor to see if you can work out a solution.